Alternative Investments - Open and closed-end funds

A "closed-end fund" is also legally known as a "closed-end company". It is an investment company that sells a fixed number of shares at a one-time initial public offering. Shares are not continuously offered for sale; after the public offering, the shares typically can be bought and sold only on a formal exchange such as the New York Stock Exchange or the Nasdaq. Closed-end funds come in many varieties. The investment strategies, risk tolerance, return objectives and overall investment portfolios of closed-end funds vary across a broad spectrum. The investment portfolios are actively managed by investment advisers.

Once closed-end fund shares begin to trade, their prices are determined by supply and demand and not by net-asset value (NAV); therefore, the market price may be greater or less than the shares' NAV. Generally, a closed-end fund is not required to buy its shares back from investors upon request. However, some closed-end funds, commonly referred to as interval funds, offer to repurchase their shares at specified intervals.

One of the significant differences between closed-end funds and mutual funds is that closed-end funds are allowed to invest in a greater amount of "illiquid" securities. (By "illiquid" we mean securities that can't be sold within a reasonable period of time - usually seven days - at the approximate price used by the fund in determining NAV.)

Most mutual funds are open-end funds but closed-end funds are subject to similar SEC registration and regulation requirements, and are subject to numerous requirements imposed for the protection of investors. Closed-end funds are regulated under the Investment Company Act of 1940 and are also subject to the Securities Act of 1933 and the Securities Exchange Act of 1934.

Although less popular than their open-ended counterparts, these investment vehicles are worth a second look. For more on these types of funds, review the following article: Open Your Eyes To Closed-End Funds.

Open-End Fund
In simple terms, an open-end mutual fund is when a company aggregates money from many investors and invests the money in stocks, bonds, short-term money-market instruments or other securities. Investors purchase mutual fund shares directly from the fund itself at a price that is determined by the fund's per-share net asset value (NAV) plus any shareholder fees that the fund imposes at purchase (such as sales loads). Mutual fund shares are "redeemable": when the holder of the mutual fund shares wants to sell those shares, he or she sells them back to the fund (or to a broker acting for the fund) at their approximate NAV minus any fees the fund imposes at that time (such as deferred sales loads or redemption fees). Open-end fund shares cannot be bought or sold in secondary markets, such as the New York Stock Exchange or the Nasdaq.

In most cases, mutual funds sell their shares continually to investors. However, there are circumstances where the investment adviser may close the fund to new investors - usually when it's decided that the fund has become too large to manage effectively. Like closed-end funds, the investment portfolios of open-end mutual funds vary broadly across many investment styles, return objectives, investment strategies and risk tolerance.

The fees charged by mutual funds can significantly impact total return and should be carefully assessed by investors. All funds charge investors some level of management fees for operating the fund. Some also pass on their distribution and service costs, commonly referred to as "12b-1" fees. In addition, "load" funds impose a sales charge when the shares are purchased (front load) or sold (back load). To cater to a wide variety of investors, funds may create a number of different "classes" of shares, with each class having different fees and expenses. Finally, some funds calculate sales charges based on the investment amount with larger investments incurring smaller fees (or eliminating the fee altogether). These investment threshold levels, known as breakpoints, are important features for investors.

Net Asset Value
Related Articles
  1. Professionals

    Investment Analyst: Career Path and Qualifications

    Learn how to prepare for a career as an investment analyst, and read more about how many professionals in the field progress during their careers.
  2. Professionals

    CAIA Vs. CFA: How Are They Different?

    Find out how the CAIA and CFA designations differ, including which professionals should seek either title based on their career ambitions.
  3. Professionals

    Equity Investments: CFA Level II Tutorial

    Chapter 1: Equity Valuation: Its Applications and Processes Chapter 2: Return Concepts for Equity Valuation Chapter 3: Industry Analysis With Porter's 5 Forces
  4. Professionals

    What To Expect On The CFA Level III Exam

    The Chartered Financial Analyst Level III exam, which is only offered in June, is the last in the series of three tests that CFA candidates must pass.
  5. Professionals

    What To Expect On The CFA Level I Exam

    Becoming a chartered financial analyst requires the passing of three grueling exams covering an array of topics.
  6. Options & Futures

    The Alphabet Soup of Financial Certifications

    We decode the meaning of the many letters that can follow the names of financial professionals.
  7. Professionals

    How to Ace the CFA Level I Exam

    Prepare to ace the CFA Level 1 exam by studying systematically.
  8. Personal Finance

    How To Choose A Financial Advisor

    Many advisors display similar skillsets that can make distinguishing between them difficult. The following guidelines can help you better understand their qualifications and services.
  9. Investing

    Asset Manager Ethics: Investment Process and Actions

    Managers, in developing their investment process, need to determine some “general rules” that make it meaningful. We offer six.
  10. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  1. Personal Financial Advisor

    Professionals who help individuals manage their finances by providing ...
  2. CFA Institute

    Formerly known as the Association for Investment Management and ...
  3. Security Analyst

    A financial professional who studies various industries and companies, ...
  4. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly ...
  1. What are the differences between a Chartered Financial Analyst (CFA) and a Certified ...

    The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>
  2. How do I become a Chartered Financial Analyst (CFA)?

    According to the CFA Institute, a person who holds a CFA charter is not a chartered financial analyst. The CFA Institute ... Read Full Answer >>
  3. What types of positions might a Chartered Financial Analyst (CFA) hold?

    The types of positions that a Chartered Financial Analyst (CFA) is likely to hold include any position that deals with large ... Read Full Answer >>
  4. Who benefits the most from prepaid expenses?

    Prepaid expenses benefit both businesses and individuals. Prepaid expenses are the types of expenses that are bought or paid ... Read Full Answer >>
  5. If I am looking to get an Investment Banking job. What education do employers prefer? ...

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ... Read Full Answer >>
  6. Can I still pass the CFA Level I if I do poorly in the ethics section?

    You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't ... Read Full Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  2. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  3. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  4. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  5. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
  6. Discount Bond

    A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the ...
Trading Center